Operation Short Sell - Trade with air?

In the past two years, even in a bear market, the number of sales of securities "uncoated" markedly below those conducted purchases.

Apparently, this is due to rigid rules of trade "bare", not allowing the trader to sell at the best from his point of view, at times, as well as to the mentality of a certain part of the market participants are not willing to deal with air and contribute to the further decline of the market.


Sale of securities "bare» (Short Sell) on the stock market often causes confusion with beginners. Indeed, if you trade only with the trend, based on a well-known principle of «trend is friend», how to behave in a bear market trader? Clearly, in a falling market is an urgent need to sell off all the assets. What's next? Sit back and wait when the market turns up again to buy assets at the lowest cost?

To improve the liquidity of the stock market assets and attract additional investors to it, market participants and relevant regulatory bodies have agreed on the fundamental features of the stock market to sell financial instruments "uncovered" that is, without the physical presence of the trader.

Naturally, the corporation was not happy with the decision, because, in their opinion, in a falling market a large army of speculators who trade with the trend, can significantly exacerbate the situation, and even cause a panic on the stock exchange, which will ultimately fail the course selected asset and allow speculators reap the profits. Therefore, the U.S. regional exchanges, SEC and the Federal Reserve made a number of rules designed to prevent that from happening. Primary among them are the following.

• The number of open positions on a particular stock for Short Sell orders should not exceed the total number of shares issued to the market. That is actually a trader can not sell air. Before you execute the order Short Sell, the broker should take somewhere that stock.

• The process of loan stock is strictly regulated and controlled by the SEC. Broker in no case has the right to hold from customers with accounts like Cash Accounts. Only from client margin accounts. If among all accounts with a margin at the broker does not show the assets on which his client was put warrant Short Sell, he can take them with another broker.

• When the operation Short Sell guided generally by the same rules as for operations Buy on margin. Only in this case, the requirements to the level of the actual margin. This level is about 10-15% higher for the sales of "bare" with margin than the corresponding rate for purchases on margin. For example, the NYSE minimum required to maintain the margin on sales of "bare" is 30% (versus 25% of the purchase). Accordingly, the broker to exchange 30% of this adds even more interest, leading sometimes to the actual margin requirement to 35%.

• Employed securities broker may at any time be claimed back by the creditor (who may also want to sell them in a falling market). This will cause the broker to find new lenders, thereby trying to throw the debt from one source to another. If he did not succeed, the broker may at any time make the offset deal on account of trader, covering his open stance Short Sell without notice. This essentially means that your short position can be covered by a broker at any time, even if you are carrying at this point loss on the transaction.